Birla Sun Life gears up to strengthen its markets, undaunted by its slip in industry rankings. Says CEO Nani Javeri, "The race is not going to end tomorrow and heavens will not fall if there is a slippage in the rankings for one year." By Venkatchari Jagannathan

Chennai: Makhwana Road is one of those nondescript streets in Mumbai's Andheri East. Equally nondescript is the Vaman Centre located on that street. But what is interesting is presence of the Rs921-crore (premium income) Birla Sun Life Insurance Company Limited.

Declares chief executive officer Nani B Javeri, "For us integrity and reputation are important. In the financial services industry there is a great responsibility of being in a fiduciary capacity."

The former banker – Javeri, an old ANZ Grindlays hand was instrumental in turning around the fortunes of the lacklustre Times Bank (floated by the owners of The Times of India's Bennet Coleman & Co) as its MD. After its sale to HDFC Bank, Javeri took over as general manager of the Oman International Bank in Muscat, before returning to India to steer Birla Sun Life.

Javeri is a vocal articulator of good market conduct by life insurers even at the Life Insurance Council meetings. It is not just public posturing in his case; Javeri practices what he preaches - though at considerable cost.

For instance, he stopped the profitable Birla Sun Life Keyman insurance policy, which contributed almost 20 per cent of its total business as he did not want to match the competition's market malpractices. In fact, the regulator, Insurance Regulatory and Development Authority (IRDA) had to intervene to allow only term assurance covers under Keyman insurance.

It may be recalled, many companies were misusing the keyman policies, meant to compensate the company in the event of death or departure of the executives, by assigning them to the individual executives on their departure from the company and allowing them to encash the policies. This practice enabled companies to avoid tax without incurring actual expenditure and helped life insurers to show bulging toplines.

"When in doubt, we seek clarifications from IRDA before acting," adds Birla Sun Life's appointed actuary, K S Gopalakrishnan.

The company has several firsts to its credit. It was the first to offer the 14-day 'free look' period for policyholders, which has now become the statutory norm. Similarly Birla Sun Life was the first to introduce the practice of written illustrations explaining the projections on the returns to the policy holder and signed by the agent and the client. This helps the client from being taken in by rosy oral projections.

Even the competition agrees about Birla Sun Life's commitment to ethics. Says the marketing head of a rival company, "Birla Sun Life is positively different when it comes to its market conduct."

Adds an appointed actuary of another life insurer, "Birla Sun Life seems to have imbibed good management practices. Similarly it seems to have a good risk management system."

Like Infosys Technologies Limited, this life insurer is not the industry leader in terms of employee compensation. But it consciously invests in its people and employees take pride working there.

Top line growth is not the end
However, Birla Sun Life has seen its position slide from its long held rank as the third third-largest earner of fresh premium amongst private sector life insurers.

In the first quarter of the current fiscal the company booked new business totaling Rs81.67 crore, down from Rs93.62 crore earned during the first quarter of FY 2005. Last fiscal, Birla Sun Life earned a fresh premium income of Rs621 crore.

According to Javeri, if the international practice of taking just 10 per cent credit for single premium policies were to be applied, Birla Sun Life would retain its number three slot. "The focus on top line growth has always resulted in corporate disasters," he adds.

The fall in premium income is due external and internal factors like: (a) the imposition of the fringe benefit tax (FBT) (b) the rate war in the group insurance segment (c) market malpractices by the competition and (c) IRDA's ban on new corporate agents (now revoked). The one internal factor is the company's self- restraint from playing dirty at the market place.

Nevertheless, most executives are sensitive to reports on their company losing its rankings. Asserts Javeri, "Let us see who declares profit first. The race is not going to end tomorrow and heavens will not fall if there is a slippage in the rankings for one year."

The basis of confidence
More than the top line, the important aspects from shareholders point of view are - policy size, product profitability, mortality / morbidity experience, capital efficiency and premium and policy persistency. And, Birla Sun Life scores well in all the aspects, accounting for Javeri' confidence of being able to declare that a profit would be made next year.

The average premium per policy (APPP) at the end of first quarter is a healthy Rs26, 233. Similarly the premium and policy persistency ratio is 96 per cent. "Unlike traditional life policies, in unit-linked polices, premium persistency and policy lapse ratios are not synonymous. The policyholder may just pay a small sum to keep the policy alive," explains Gopalakrishnan.

He expects the renewal premium to be twice its fresh business in 2007-08. For the current fiscal the renewal premium target is Rs790 crore.

The actual mortality / morbidity experience is less than what was assumed while pricing the products. Softening the claims impact on the bottomline is the company's strategy of reinsuring all policies with a sum assured over Rs5 lakh. (See: ) "Last year our net payout was Rs33 crore (death claim of Rs9 crore plus others like surrenders, maturity benefits of Rs28 crore, minus reinsurance receipts Rs4 crore)," says Gopalakrishnan.

Even the assumptions on expenses while pricing the products have not gone haywire. Anil J Jhala, CFO, is confident of bridging the expense gap and declare cash break shortly. Expense gap is the difference between priced expenses and actual expenses. Priced expenses are the expenses assumed while pricing of the products for a required rate of return.

A rank- holding chartered accountant Jhala says, "Most of the expenses incurred by a life insurer are enablers for increased business. My mandate is to see that the enabling aspect is not affected while unnecessary costs are cut."

The one visible cost saving measure is the shifting of corporate office from the Birla Group's Ahura Centre to the current location to save on the rental outgo. Similarly the ad spend also reduced to Rs11 crore from Rs13 crore in 2003-04. Last year the company weeded out around 5,500 non productive agents.

The company also ranks ahead in capital efficiency. Gopalakrishnan says the Rs370-crore equity company hasn't demanded huge additional capital infusion. (See: ). This year there will be an additional equity funding of Rs80 crore.

In addition the company has brought down its net loss to Rs61 crore last fiscal from Rs77 crore logged in 2004-05. The cumulative loss figure as on 31^st March 2005 is Rs244 crore.

Challenging days ahead
While Javeri targets a fresh premium income of around Rs1,550 crore this year, there are serious questions on how the company would cross the hurdles of the changed environment.

For instance, a couple of years ago Birla Sun Life had the first-mover advantage in launching unit-linked policies (ULIP), group business and signing up bancassurance deals that fetched high-value policies.

However, today, all insurers offer ULIPs. And they are all courting banks and corporate agents for their distribution. In addition, they have the advantage of sizeable individual agency force and wide branch network, which Birla Sun Life lacks.

Thanks to the fringe benefit tax and the raging rate war, the group insurance business turns to be a sensitive issue. Up to June 2005, the company earned Rs4.59 crore premium from group business (single and non-single premium) as against Rs22.22 crore earned during the corresponding period the previous year. In FY 2005 Birla Sun Life was able to complete only Rs89 crore against a target of Rs179 crore - barely scraping past the half-way mark.

According to an insurance-sector analyst, the rates quoted by some insurers are so low that insurers imagine that they are ensuring the mythological Markandeyan - the boy who remains eternally 16-years old and is immune from death. Says Peter J Akers, chief operating officer, "The group insurance has become a commodity business with the price becoming the deciding factor."

Further there is also a complaint that the policies have higher expense load while the fund values are slightly lower than that of competition.

Reacting to the expense load charge, Gopalakrishnan says, "Our expense load in the case of 'classic' product series is lower than that of the competition. The 'flexi' series products cannot be compared with others as they are traditional products."

According to Jhala, the company follows a conservative investment policy. It invests only in blue-chip stocks and does not invest in the volatile mid cap stocks. To validate its investment philosophy, Birla Sun Life hired CRISIL Limited to compare and contrast the returns earned by the company's different funds vis-a-vis the competition. By and large the returns were similar.

As a strategy to tackle the challenges thrown up by the changed market conditions, the company plans to mine more business from the existing bancassurance relationships.

Says P Nandagopal, senior vice president, alternate channels and group life, "Though we have bancassurance deals with 10 banks, only a few of their branches sell the policies. We would like to exploit the opportunities here while looking out for newer relationships."

According to executives, the company is negotiating couple of group business deals and even if one of them materialises, Birla Sun Life would be catapulted to the second position. The target for alternate channels (banks, corporate agents and group business) has been set at Rs950 crore.

No alternative to alternate channels
But industry watchers strongly feel that the company should ramp up its agency force and the branch network to regain lost ground. Already the company has lost precious time, as it hasn't found replacement for the field force that was weeded out.

Last fiscal the agency force brought in Rs262 crore - just over 40 per cent of the total business - as against a target of Rs300 crore. For FY 2006 the target for this channel is Rs600 crore.

Speaking about the performance of the field force, chief manager, field operations direct sales force, Murali Iyer says, "The agent activation rate (agents who start selling policies after their induction training) is nearly 35 per cent. The average productivity per agent per month is around 3 policies with an average sum assured of Rs2.3 lakh."

The agent to churn ratio is around 30 per cent without taking into account last year's weeding out of non- performing agents.

However, Javeri is agreeable to the idea of expanding branch and agency network if the group business continues to go down. "I am uncomfortable having a huge army of agents risking compliance and service quality issues. From the beginning we have been targeting only 50 per cent business from individual agency force."

The number of agents will be increased to 19,000 by adding 10,000 more this year and the number of branches will be expanded to 55 by opening 11 new ones this fiscal.

But branch offices for the company are purely sales offices with underwriting and post sales services being centralised at the corporate office. Reasons Mario Braganza, vice president, client services and underwriting, "Branch offices should be sales oriented and the administration of policy should not bother the sales force."

The company is also in the process of automating its underwriting process. According to MC Raisinghani, VP, Technology, the company is in the process of upgrading its existing solution `Ingenium' to 6.6 version. (See:)

To increase its product promotions, the company has also increased its media budget this year. According to Anjana Grewal, vice president, marketing and communication, "The campaign this year will be more about products and product branding." For the first time the company has allocated a small share for advertising on the net.

Sums up Gopalakrishnan, "Our products and strategies are strong. We are confident of winning the marathon." The twists and turns start from Makhwana road.